If you have been looking into getting a reverse mortgage, then undoubtedly you have heard that one of the negatives repeatedly cited is that the costs are high. On the surface this seems to be a true statement. However, if you start dissecting the costs of a reverse mortgage and compare those costs to alternatives like selling your home and moving, you may find that the costs are only high if you have other assets or sources of income to access other than your home. If you truly need a reverse mortgage in order to make ends meet or for other financial reasons, then you may realize that the costs are not too high given your particular circumstances.
Lets take a closer look at what the real costs of a reverse mortgage are and what these costs pay for.
The majority of reverse mortgage loans that have closed in the United States to date, have been the FHA insured HECM (Home Equity Conversion Mortgage.) Because these loans are insured by FHA and backed by HUD they are considered to be the safest reverse mortgage loans available and usually offer the most benefits and more choices of how you can elect to receive your loan proceeds.
The guarantees that you receive with the FHA insured HECM reverse mortgage loan are:
1. Under the tenure option you will continue to receive your monthly payments from your reverse mortgage as long as you live in your home. That means that even if you outlive your life expectancy and your house is not worth as much as your reverse mortgage has paid you, you will continue to receive those payments, until you permanently leave your home. Guaranteed!
2. Your heirs or your estate will NEVER owe more on the loan than the value of your home at the time the loan is repaid. Reverse Mortgage loans are non-recourse loans. The lender can never come back to your estate or your heirs if there is a shortfall at the time of repayment.
3. Additionally, if the lender should happen to go out of business, the FHA insurance guarantees that you will continue to receive your monthly payments or have access to your credit line in accordance with the terms of your original loan agreement.
If the FHA mortgage insurance was not available, you can be sure that there would be very few lenders willing to make reverse mortgage loans with the favorable terms that are offered to seniors today.
The cost of the FHA insurance premium is 2% of the loan amount. The insurance premium along with other closing costs are rolled into the loan. They are not upfront out of pocket expenses, they are simply paid by you or your estate at the time the loan is repaid.
Loan Servicing Fee:
A monthly loan servicing fee of up to $35.00 per month is charged to the borrower as part of the overall closing costs. All lenders charge a loan servicing fee. However, on a forward mortgage the loan servicing fee is incorporated into the interest rate on the loan, so the borrower often times isn’t even aware of it.
On a Reverse mortgage the servicing fee is set aside upfront and is calculated based upon the life expectancy of the youngest borrower. The lender receives the servicing fee each month as long as the loan is in force. If the borrower leaves the home permanently before the servicing set aside is exhausted, the balance remaining is distributed to the borrower or the borrowers’ estate.
Loan Origination Fee:
The loan origination fee is the fee that is charged by the lender to originate, process and close your reverse mortgage loan application. FHA caps the loan origination fee at 2% of the value of the house or the maximum FHA loan limit for your geographical area, whichever is less. FHA also states that the origination fee in any case is not to be less than $2000. (At the time of this writing, Congress and HUD are discussing changes to this mandate.) Some lenders have been known to negotiate the loan origination fee to compete for business.
The three fees mentioned above make up the lions’ share of the closing costs for a reverse mortgage. In addition to these three, you will have costs that you are familiar with from previous mortgages that you have had. They are fees such as, appraisal, credit report, flood certification, courier, recording, document preparation, pest inspection, closing or escrow fee, title insurance, survey. (This may or may not be a complete list, depending on your area of the country.)
So Are The Costs Really Too High? – You Decide
It is best to view the costs in comparison to the value that you will receive from the benefits of getting a reverse mortgage. You must evaluate the costs compared to the improvement in your lifestyle, your increased monthly income, and the fact that you are not burdening your children at this time in your life. Personally you will not feel the impact of the closing costs. They are simply a cost from your estate at the time your house is sold or refinanced and the loan is paid off. It is foolhardy to reject the idea of getting a reverse mortgage based strictly on the cost of this valuable financial planning tool.
After all, if you considered one of the obvious alternatives, which would be to sell your home, you would be looking at paying 6% in real estate commissions as well as typical sellers’ closing costs and possibly some costly home
repairs. You would then have relocation costs for yourself which could include a down payment of 5% – 20% for another home, moving expenses of $5,000. or more and closing costs of 2% – 3% for a new mortgage. As you can see the cost of selling your home far outweighs the cost of obtaining a reverse mortgage.
A Word of Caution:
Now that you know that the costs for a reverse mortgage do tend to be higher than the costs of a traditional forward mortgage, hopefully you also have an appreciation for why they are high. That being said, you probably are not a candidate for a reverse mortgage if you anticipate permanently leaving your home in less than five years. Five years seems to be the consensus among industry experts, to be the critical time frame to remain in your home to make the costs worthwhile. If you feel you will leave your home sooner than five years, you should consider alternative options, such as a cash out refinance or a home equity loan to tide you over until you sell or move out of your home.